10th Circuit rejects closed Aspen restaurant’s suit against insurer over Covid losses
An Aspen restaurant’s lost income from business interruptions due to government lockdowns and restrictions at the onset of the COVID-19 pandemic are not covered by its insurance policy, a federal appeals court ruled last week.
The U.S. Court of Appeals for the 10th Circuit on Thursday upheld a previous ruling that the now-defunct L’Hostaria’s policy through Cincinnati Insurance didn’t cover property-damage claims, which the restaurant’s lawyers argued were triggered by COVID-19 contamination and public-health orders.
“For Sagome (the corporate name for L’Hostaria) to be covered, COVID-19 had to injure or harm its property in some physical manner. But Sagome did not — and could not — plead such damage, because COVID-19 does not physically injure or harm property,” said the 10th Circuit’s ruling.
L’Hostaria’s policy did not specifically exclude viral contamination from covered losses, according to court filings. Public-health orders forced the restaurant to close from March 20, 2020, to April 26, 2020, and it was losing $40,000 a month “as a result of the suspension of its operations caused by direct loss to property at its premises due to the presence of COVID-19,” said the restaurant’s lawsuit. L’Hostaria went on to re-open with limited curbside-pickup and outdoor-dining before restrictions eased.
For the most part, courts have found that insurance carriers aren’t obligated to pay business-interruption claims that assert that COVID-19 contamination at a property is physical damage. According to the University of Pennsylvania’s Covid Coverage Litigation Tracker and per Reuters, insurers had prevailed in nine out of 10 business-interruption-Covid lawsuits through December.
The 10th Circuit’s opening statement in its decision, spelled out over 14 pages, succinctly captured the issue: “Like many businesses during the COVID-19 pandemic, Sagome, Inc.’s restaurant, L’Hostaria, suffered significant financial losses from reduced customer traffic and government lockdowns and restrictions. And like many businesses, it sought to recover under its comprehensive general insurance policy. And like many insurers, The Cincinnati Insurance Company denied coverage because the virus did not impose physical loss or damage as required by the policy. Sagome sued, but the district court concluded its financial losses were not covered. Addressing Sagome’s coverage under Colorado law, we agree and affirm. COVID-19 did not cause Sagome to suffer a qualifying loss because there was never any direct physical loss or damage to L’Hostaria.”
L’Hostaria’s appeal asked the 10th Circuit to apply Colorado law to determine whether a building contaminated with the COVID-19 virus constituted property damage. The appeal challenged a September 2021 judgment by Colorado federal court Judge William Martinez, who dismissed L’Hostaria’s lawsuit against Cincinnati Insurance.
Martinez’s order said the judge would not deviate from the majority of U.S. courts that had sided with insurance companies sued for denying business-interruption claims.
“The landscape as a whole has not been good for policyholders,” said Denver lawyer Brad Levin, who with Susan S. Minamizono sued Cincinnati Insurance on behalf of L’Hostaria in December 2020 in Pitkin County District Court. The case was transferred to the U.S. District Court for the District of Colorado in January 2021.
L’Hostaria’s written appeal from Jan. 13, 2022, argued that “physical substance invisible to the naked eye fortuitously contaminated its premises and L’Hostaria was forced to close its building and shut down its operations pursuant to orders issued by public authorities.”
The 10th Circuit’s decision disagreed, saying L’Hostaria’s argument “does not comport with the policy’s plain language and is not compelled by Colorado law.”
“For coverage, the loss or damage itself must be physical, not simply stem from something physical,” the order said.
Much of L’Hostaria’s argument was pinned on a state case law established by the Colorado State Supreme Court’s decision in 1968 over a case called Western Fire Insurance Co. v. First Presbyterian Church. In that case, the state’s high court concluded that gas under and around a church’s premises made it dangerous and uninhabitable, and though that threat was not visible to the human eye, the church’s “loss of use equated to a direct physical loss.”
“We felt pretty strongly that this decision that the Colorado Supreme Court made in the Western Fire case was important, but the 10th Circuit didn’t see it that way,” Levin said Monday.
The 10th Circuit’s ruling said the Western Fire decision did not apply to L’Hostaria’s dispute with Cincinnati Insurance.
“Here, Sagome pled that COVID-19 — which can cause illness — was in its restaurant. But it did not plead that COVID-19 built up to the point of making its property ‘uninhabitable.’ Nor could it. COVID-19 did not affect Sagome’s property like the gasoline in Western Fire and ‘render (the) restaurant unsafe and unusable for any and all purposes whatsoever,’” the ruling said, noting “Sagome’s property was never rendered uninhabitable or unusable. Sagome did not suffer a total or even partial physical loss. In sum, Sagome was not covered under the policy’s plain language, and Western Fire does not change that conclusion.”
The 10th Circuit also denied L’Hostaria’s argument that its civil authority coverage applied to its losses. Civil coverage can be applied when a government entity blocks access to an insured business’ premises, like during a natural disaster or life-threatening event.
Levin said it was too early to say what L’Hostaria will do next. A petition for a rehearing must be filed within 14 days of the Jan. 3-dated order, according to court documents. An oral hearing on the matter was held in November in Denver federal court.
L’Hostaria Ristorante, located in the garden level in the 600 block of East Hyman Avenue, closed in 2021 after 25 years in Aspen, where it gained an avid and loyal following.
Snowmass Tourism announced the appointment of Drew Welsheimer as the organization’s new sales group sales director. His first day was Jan. 26.